MNI ASIA MARKETS ANALYSIS - Oil Slides As EU Price Cap Talks Stall

US TSYS: Treasuries See Late Rally To Keep Post FOMC Minutes Bid In Early Close

• Cash Tsys rallied sharply into the early close on likely positioning into the weekend, retracing a large part of the intraday cheapening from a strong open, with the net result being most of the curve sitting 1.5-3bps richer from Wednesday’s post FOMC minutes close except for the very long end.
• TYZ2 trades 113-02+ off a session low of 112-19+ but remains below initial resistance at yesterday’s high of 113-15, clearance of which is needed to see a resumption of the uptrend towards key resistance at $113-30 (Oct 4 high).
• Fedspeak highlights Monday with NY Fed’s Williams with text and full Q&A plus an interview with Bullard, before Powell on Wed and payrolls on Fri. Fed Funds pricing sits at 53bp for the Dec 14 decision whilst the terminal in May/Jun’23 has fluctuated between 4.97-5.09% this week, latest 5.00%.

FOREX: Greenback Close To Unchanged, Consolidates Week’s Decline

• A brief bout of greenback strength on Friday was met by firm supply and the USD index looks set to close the day near to unchanged, consolidating ~1% losses this week.
• Little news crossing the wires kept currency markets lacking momentum to end the week, as was broadly expected given the US Thanksgiving holiday.
• The greenback was led higher by some overnight strength in USDJPY, which recovered the entirety of Thursday decline, closely matching the previous day highs around 139.60 before moderating into the close. Having traded through support this week, the focus now turns to 137.68, Nov 15 low and a bear trigger.
• Elsewhere, CNH (-0.37%) marginally underperforms as the Chinese central bank signalled a cut to the RRR policy rate by 25bps. Given the move was largely as expected the Yuan’s price action remained largely contained.
• Potentially below average holiday liquidity accentuated some currency moves in emerging markets, with the HUF recovering around 1% against the Euro and the Brazilian Real (-1.80%) coming under renewed pressure amid ongoing fiscal concerns and as markets await the President-elect’s pick for finance minister.
• Another quiet start on the data front next week leaves central bank speakers in the spotlight. However, activity may pick up as we approach the latest US employment report scheduled for next Friday.

EGBs-GILTS CASH CLOSE: Eyeing Next Week's Hawkish Risks

The key theme of the week - curve flattening, and in particular German inversion - abated in the closing session of the week, with the long end selling off.

• The broader impetus for the sell-off is thinner liquidity meeting profit-taking, particularly ahead of an extremely busy week that includes Eurozone inflation data and commentary by US Fed Chair Powell.
• That's a schedule rife with potential hawkish risks (Powell pushback on pivot speculation, high eurozone inflation print), the recent dovish rally.
• Today markets appeared to eye ECB Muller's warning against a premature end to tightening: terminal ECB rates picked up 4-5bp.
• This repricing led to BTPs underperformance, with 10Y yields rising more than 20bp (the biggest in nearly 2 months) and spreads reversing Thursday's tightening.
• BoE terminal pricing picked up a few basis points as well, with the short end underperforming.

Closing Yields / 10-Yr Periphery EGB Spreads To Germany

• Germany: The 2-Yr yield is up 8.4bps at 2.197%, 5-Yr is up 11.3bps at 2.009%, 10-Yr is up 12.3bps at 1.973%, and 30-Yr is up 8.6bps at 1.879%.
• UK: The 2-Yr yield is up 8.3bps at 3.292%, 5-Yr is up 6.8bps at 3.288%, 10-Yr is up 8.3bps at 3.121%, and 30-Yr is up 5.9bps at 3.334%.
• Italian BTP spread up 5.6bps at 188bps / Spanish up 3.2bps at 98bps

US OPTIONS: Mostly Upside In Abbreviated Session

Friday's US rates / bond options flow included:

• SFRF3 95.06/95.18/95.25/95.37c condor, bought for 3.25 in 3.5k
• SFRU3 95.25/94.75ps, sold at 23.5 in 5k
• SFRH3 94.62p, sold at 5.25 in 15k (on block).
• EDZ3 97.00p vs SFRZ3 97.00c, sold the put at 176.5 in 10k.
  

EU OPTIONS: Big Upside And Downside Euribor Buying Continues

Friday's Europe rates / bond options flow included:

• RXZ2 142c, bought for 3 and 5 in 2.6k
• ERZ2 97.87/98.00/98.12c fly bought for 2.5 in 35k (has been bought in at least 46k prior to today; targeting upside covering events through to Dec 19)
• ERZ2 97.75/97.625 1x2 put spread bought for 1 in 5k. Note this was bought in 15k yesterday

STIR: Upward Terminal Hike Repricing As Dec ECB Edges Toward 75bp

Friday saw slightly more hawkish profiles for BoE and ECB rates over the cycle, with the ECB leading the way higher (we had noted last week that 75bp hike odds had likely been underestimated). Hawkish comments by ECB's Schnabel yesterday and Muller today are seen contributing.

• Dec ECB hike pricing ticked up to 62bp, just under 50% chance of a 75bp hike. Terminal pricing rose around 4bp to 2.93% in Jul 2023.
• BoE hike pricing for Dec was steady at 57bp, though terminal pricing picked up 4bp to 4.68% (Aug-Sep 2023) in sympathy with the global move.

COMMODITIES: WTI Sees Lowest Close Since January

• Crude oil reversed gains from earlier in the day as European talks on a price cap for Russian oil continue into next week against a backdrop of China Covid-linked demand concerns. Russia drafting a decree to ban oil sales to price-cap participants helped stabilise the decline, but it still saw WTI close at its lowest level in eleven months.
• WTI closed -2.1% at $76.28, starting to eye the medium-term key support at $74.96 (Sep 28 low)
• Brent is -1.5% at $84.04, nearing support at $82.31 (Nov 21 low) but with its medium-term key support lower at $80.94 (Sep 26 low).
• Gold is -0.02% at $1754.90, remaining between resistance at the bull trigger at $1786.5 (Nov 15 high) and support at the 20-day EMA of $1726.4.
• Weekly moves: WTI -6.6%, Brent -4.1%, Gold +0.2%, US Nat Gas +10.3%, TTF Nat Gas +7.7%, with US gas gaining despite trimming weekly gains with milder weather expected.

FED: Lowest Reverse Repo Uptake Since Jun 3

• Instead of seeing a pick-up due to post-holiday market frictions, RRP uptake dropped a further $38B to $2.031T, down $82B on the week to the lowest since Jun 3 prior to the FOMC ramping up its hiking pace.
• It has firmly passed the previous recent low of 2.087T (Nov 15) that was seen partly down to mid-quarter Tsy settlements and cash market repositioning after the US CPI release earlier sparked a significant Tsy rally that made repo rates relatively more attractive.
• Long term trends see usage materially lower, with GS forecasting RRP usage to fall by $750B by end-2023 and MS estimating RRP balances of around $1.2T by end-2023.
• There were 90 participants, the lowest mid-May.

US TSYS: SOFR Dip Could Persist: Wrightson ICAP

SOFR fell slightly Wednesday (pre-Thanksgiving data just released today) to 3.79% from 3.80% (had been 3.80% or above for 6 consecutive days).

• Wrightson ICAP attributes the dip to "unexpected softness" in Delivery-versus-Payment (DVP) rates on Wednesday. (SOFR includes all trades in Broad General Collateral, and bilateral repo cleared through the DVP service offered by FICC).
• Today Wrightson ICAP expects the SOFR softness could reverse amid Treasury auction settlements, but see SOFR dipping again by next Tuesday to 3.78%, remaining between there and 3.79% until the FOMC meeting. That contrasts vs the 3.81% high on Nov 16.

GLOBAL: Industrial Production Looks Set To Moderate Going Forward

Industrial production has held up quite strongly in the past 12 months considering multiple headwinds including waning demand, soaring energy costs, supply chain disruptions, and renewed Covid lockdowns.

• MNI estimates global industrial production came in at between 3-4% Y/Y in October, a sharp pullback from 4.8% in September which was a 13-month high. (The latter matches exactly with the IP estimate by the Netherlands' CPB but they have not yet estimated October - see chart).
• However, production has been buoyed by China's strong start to the year and more recently, global catch-up in filling backlogs as supply chain constraints have eased.
• Neither of these will be repeated into early 2023, and forward looking indicators including PMIs and confidence surveys point to a dip in the global IP aggregate back towards 0% Y/Y - another piece in the global recession puzzle.

% Y/YSource: MNI Calculations, CPB